Private-equity financing generally occurs in rounds. A round generally features a sale of some portion of a company. For example, in a first round of financing, a start-up company may sell 10% of the ownership in the company in exchange for $50,000. Immediately, after such a transaction, most would agree the start-up company has a value of $500,000. That is, if 10% is worth $50,000, then 100% should be worth $500,000. Some time later, the start-up may sell another 10% for $60,000 resulting in a new valuation of $600,000. Such financing rounds may continue until an exit round such as an IPO (Initial Public offering) or sale to a private venture.
Financing rounds may be months or even years apart. This poses a question. What is the value of a private equity investment between rounds? Many investment firms take a conservative approach and value a private equity investment based on the price of the most recent round of financing. Such firms would value the start-up at $500,000 during the time period between the first and second rounds even though this value becomes increasingly stale. Other investment firms value their outstanding investments more aggressively. As a result, valuations of private equity investments between financing rounds may be unreliable both across time, because of difficulty in gauging the value of a private equity investment between rounds, and across investment firms, because of different methods of valuing private equities. These differences can make it difficult to accurately monitor a portfolio, analyze risk, and benchmark the performance of private equity investments.